Briefing by the Department of Public Enterprises on : 1. Issues emanating from the State of the Nation Address 2. Progress in addressing audit findings of the Auditor-General on the department and state-owned companies for the 2018/18 year 3. Report back on recommendations of the BRRR Report and Budget Vote Report 2018 Date : 13 February 2019 Venue : Committee Room 3
SONA 2018 and 2019 2
2018 SONA Commitments COMMITMENTS PROGRESS • The renewal of a capable developmental state has • Building growth, development and transformation depend commenced. Work on the reconfiguration of the state is at on a strong and capable state. an advanced stage. • It is critical that the structure and size of the state is • The President indicated during the new structure and form of optimally suited to meet the needs of the people and ensure Government will be revealed after 2019 National and the most efficient allocation of public resources. Provincial Elections. • We will therefore initiate a process to review the • The DPE and NT are spearheading the work of optimizing configuration, number and size of national government SOC to ensure an effective agents of development. This departments involves identifying of assets suitable for disposal, involvement of private capital, formation of new entities. • We have sought credible plans from boards to put in place • Many of our state-owned enterprises (SOEs) are the right skills and expertise to manage these companies so experiencing severe financial, operation and governance that we can shift the focus from immediate stability to long- challenges, which has impacted on the performance of the term sustainability. economy and placed pressure on the fiscus. • We also seek to build a pragmatic and cooperative • We will intervene decisively to stabilize and revitalize SOEs. relationship between government, organised labour and private sector stakeholders, where we can jointly determine a strategic path for SOEs to create jobs, enable inclusive growth and become operationally and financially sustainable. • The DPE is developing, in consultation with Policy Departments and NT, appropriate SOC restructuring options. 3
2018 SONA Commitments COMMITMENTS PROGRESS • • Recent action we have taken at Eskom to strengthen The new business model needs to take into account the governance, root out corruption and restore its financial root causes of its current crisis and the profound position is just the beginning of the processes we are going international and local changes in the relative costs, and to embark on. market penetration of energy resources, especially clean technologies. • It needs to take into account the role that Eskom should play in clean generation technologies. • We will embark on a process of establishing three separate entities – Generation, Transmission and Distribution – under Eskom Holdings. • • The Government will take further measures to ensure that We want our SOEs to be fully self-sufficient and be able all state-owned companies fulfil their economic and to fulfil their development and economic role. developmental mandates. • Where SOEs are not able to raise sufficient financing from • We will need to confront the reality that the challenges at banks, from capital markets, from development finance some of our SOEs are structural – that they do not have institutions or from the fiscus, we will need to explore sufficient revenue stream to fund their operational costs. other mechanisms, such as strategic equity partnerships or selling off non-strategic assets. • As we do all this, we will not support any measures that, in any form, dispose of assets of the state that are strategic to the wellbeing of the economy and the people. 4
2018 SONA Commitments COMMITMENTS PROGRESS • These SOEs cannot borrow their way out of their • We have established the Presidential SOE Council, financial difficulties, and we will therefore undertake a which will provide political oversight and strategic process of consultation with all stakeholders to review management in order to reform, reposition and the funding model of SOEs and other measures. revitalize state owned enterprises, so they play their role as catalysts of economic growth and development. • We will change the way that boards are appointed so • We are making important progress in restoring the that only people with expertise, experience and integrity and capacity of our strategic state owned integrity serve in these vital positions. enterprises. • We will remove board members from any role in • To restore proper corporate governance, new boards procurement and work with the Auditor-General to with credible, appropriately experienced and ethical strengthen external audit processes. directors, have been appointed at Eskom, Denel, Transnet, SAFCOL, PRASA and SA Express. • As we address challenges in specific companies, work will continue on the broad architecture of the SOEs sector to achieve better coordination, oversight and sustainability 5
2018 SONA Commitments COMMITMENTS PROGRESS • This is the year in which we will turn the tide of corruption in • Major interventions through the Boards appointed in 2018 our public institutions. has been at Denel, Eskom and Transnet with executives being held to account for malfeasance. The following instances of corruption have come to light as a result: • Transnet overpaid by ZAR 509 million in the purchase of 100 locomotives from China CRRC and Japan Mitsui, of which CRRC returned ZAR 618 million to Transnet; • Transnet in the purchase of 1064 locomotives overpaid by ZAR 17.4 billion; • Eskom without a valid contract paid ZAR 1.6 billion to McKinsey and Trillian, of which R902 million was recovered from McKinsey; • Denel wiped out ZAR 3 billion of revenues through corruption conceived Denel Asia against the advice of everyone including their owned due diligence report, which advise against doing business with VR Laser in its various incarnations; 6
Context of SONA 2019 The Eskom challenges 7
What’s the crisis? (1/2) PROBLEM ESKOM IS FACING LIQUIDITY CHALLENGES STATEMENT • High levels of debt currently at R420bn – 15% of the sovereign debt. • Cash generated does not cover operating and debt servicing costs. • Escalation of municipality and Soweto debt (R28 billion) growing at R1bn a month. • The number of employees increased from 32,000 in 2007 to 48,000 in 2018 with associated cost growing from R9,5bn to R29,5bn. ESKOM IS STRUGGLING TO MAINTAIN OPERATIONAL SUSTAINABILITY • Ageing generation fleet - about 37 years on average. • Essential mid-life refurbishments not implemented. • Poor quality of maintenance due to poor workmanship – 40% of plant breakdowns are due to human error. • Ongoing coal shortages due to poor management and lack of investments in cost plus mines. • Significant loss of critical skills and low staff morale. 8
What’s the crisis? (2/2) PROBLEM STATEMENT COST OVERRUNS AND POOR PERFORMANCE FROM THE BUILD PROGRAM • Medupi and Kusile have suffered massive delays and cost overruns due to poor planning, poor engineering designs, poor procurement practices / poor contracting and corruption. • The costs for the plants have escalated significantly to over R300bn (Medupi from R24.9 billion to R145 billion and Kusile from R80.7 billion to R161.4 billion). • Poor post commissioning , reliability at ~ 40%. GOVERNANCE • Systemic corruption, malfeasance, fraud and the state capture project has compromised the credibility of the organization and eroded investor confidence. • The resultant effect of these corrupt transaction is the pass through to consumer and the shareholder. • The ongoing revelations continue to threaten the credibility of the institution. 9
How Did Eskom Get Here? 2007 2018 Insights: Total Installed Capacity • Capacity grew slightly (MW) 42 618 45 561 over the period Electricity Sales (GWh) 218 120 212 190 • Coal Purchases – Revenue (R'bn) 39,4 177,4 volumes flat over the Average selling price 10 year period (c/kWh) 18 85,06 • Coal Purchases (Mt) 117,4 115,49 Employee costs increased significantly Coal Costs (R'bn) 10 53,8 driven by employee Employee Costs (R'bn) 9,5 29,5 benefits Employee Numbers 32 674 48 628 Debt Securities and Borrowings (R'bn) 40,5 388,7 10
How Does ESKOM Spend Money? R’bn 2007 2018 • Since 2007, revenue grew more Revenue generated 40,6 177 than 4 times mainly driven by massive tariff increases Minus Primary energy cost 13,0 85,2 Minus Employee cost • However, expenses (primary 9,5 29,5 energy and employees cost) Minus other expenses 6,5 18,8 increased faster than revenue - Maintenance growth Equals EBITDA 11,6 45,4 • EBITDA (proxy for free cash cash- Minus interest payment 1,8 31,9 flow) insufficient to cover interest costs and capex (investment) Minus Investment 14,1 55,5 requirement • Resulting in a shortfall which is covered through borrowing Surplus (Shortfall) (4,3) (42) 11
Capacity Outlook Based on Planned and Unplanned Outages Total installed nominal Capacity ~ 45000MW Breakdowns (UCLF) ~17000 MW Breakdowns (UCLF) unavailable Planned Maintenance (PCLF) Diesel Electricity demand 12
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